Crises sell newspapers, so the press is eager to find them. Here is my "translation" of a recent Associated Press disaster article :

Saturday November 24, 12:02 am ET

AP headline: "New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario"

Reality: New Wave of Mortgage Failures Have Created a Nightmare Economic Reporting Opportunity

AP reports: "…some experts say [the crisis] could spread from those already battered banks into the general economy. … The worst-case scenario is anyone's guess, but some believe it could become very bad."

Reality: Of course the "worse-case scenario" won't actually be "anyone's guess" but "AP's guess" because the AP will only report guesses that ominously predict vast economic disasters (and then call for government intervention).

AP reports: "We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times [well, he seems to be? -GR]– but, as an expert on the global credit crisis, he speaks with authority. … "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Hawley / SmootReality: The Depression wasn't a "downturn" nor caused by a downturn. It was a depression caused by a series of government interventions in the economy. Lawrence Reed's essay "Great Myths of the Great Depression" nicely outlines the Great Depression's various phases. The stock market downturn would not have led to a long term depression without government intervention. Maybe that is what Mr. Gross of PIMCO expects from Congress as it tries to jump into markets to keep them from clearing, or to invalidate loans and other contracts. Mr. Gross warns of the downturn's "effect on future lending attitudes" as a problem. But is was past "lending attitudes" that were the problem (the attitude, for example, of not bothering to check a borrower's ability to make monthly payments). If people have less equity to extract from their homes to buy stuff, they will indeed spend less and probably purchase a different mix of goods and services. Prices, markets, and the economy will adjust. Of course, until the downturn not a week went by without the media complaining that people were buying and consuming too much anyway. Where are the experts the media used to quote who informed us that America's consumer society was bad, bad, bad, and people shouldn't buy so much stuff?

AP reports: "Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy. … The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida."

Reality: If this "crisis" pushes housing prices down and way down, how does that make housing less affordable? Will the banks dismantle repossessed housing, or put it back on the market at lower prices? Will people forced out of homes they couldn't afford stay out on the street, or rent apartments, or move into smaller homes, or maybe move into the same homes once they are 40% less expensive? What other solution is there for "once-hot real estate spots" where housing mania pushed prices rapidly up 40% or more? It was the boom that created the mess. The bust is just the needed clean-up process.

AP reports: "Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute."

Reality: Would it be better for these 3 million people to continue building houses and other goods, and providing services that people don't want or can't afford? Again, the problem was the bubble that led to manic overproduction and over-pricing of housing in some markets.

Millions gambled that housing prices would keep rising, allowing them to quickly gain equity and refinance at lower interest rates. The vast majority of new home-buyers over the last five-ten years won this gamble, gained equity, refinanced, and now live happily in homes they would otherwise have not been able to afford. But some came too late to this particular party, especially in some overheated housing markets. And others, confused by good fortune with early housing purchases, bought more homes hoping to make a killing, or at least to retire early. They may instead retire late.

AP reports: "Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy."

Reality: Many Americans are unaware of a lot of things. Unfortunately, they are likely to be even less aware after reading AP scare stories like this one.





Speak your mind

5 Comments so far

  1. Invictus on November 27, 2007 6:20 am

    You're blind to believe such junk! That contradicts all prior cause and effect discussions on Vic and Laurel's fine site. Extreme credit expansion during the 20s caused the "Great Contraction." The credit contraction caused the Depression. Poor Keynesian & socialist government policies worsened or mitigated it, depending on what historian and economist you believe.

  2. Greg Rehmke on November 27, 2007 12:56 pm

    The link to Larry Reed’s “Great Myths of the Great Depression” was meant to be in my article. In addition to credit expansion in the 1920s, it was a series of interventions by Hoover and Roosevelt that turned a severe recession into a depression. The link is here:

    Reed was a student of Hans Sennholz who was a student of Mises, so his outline of the story is Austrian, though references critics of Austrian capital theory.

  3. SqueegeeManOfFairfieldCnty on November 27, 2007 2:29 pm

    I agree with Mr. Rehmke that govt policy errors caused the Great Depression. The main one was allowing the money supply to shrink (M.Friedman/A.Schwartz). Another, lesser one, was the Hawley-Smoot tariff. Both occurred before FDR, whose patchwork of measures partly worsened/partly mitigated an already existing problem (here I agree with Invictus).

    These two government errors were nearly impossible to avoid (given the way people thought at the time): expanding the money supply would have required massive open market purchases of bonds, and thus an activist policy completely out of step with the spirit of the times (which was: govt should not do anything, the economy will take care of itself, the gold standard is self adjusting). And Congressional trade policy was based on the interests of the United States looked at narrowly, not on the global picture; it would have required a mental revolution for a Congressman of 1929 to think in terms of international repercussions of a Trade Act.

    So it is a little too simple to say that "the depression was caused by a series of government interventions in the economy". Not enough intervention in one case, too much in the other, people trapped in incorrect conceptual frameworks… wrong kind of intervention…

  4. Invictus on November 29, 2007 7:32 am

    Greg, I didn’t mean to come off as condescending in my prior post. I mostly agree with, and appreciate, your writing. Still, to play alternative history and say absence intervention the credit contraction would have not caused the Depression is pure speculation.

    When you say, “The link to Larry Reed’s “Great Myths of the Great Depression” was meant to be in my article.” Are you predicting similar mistakes will be made in the near future?

  5. SecondAsstWebMaster on November 29, 2007 1:21 pm

    Quote. The link to Larry Reed’s “Great Myths of the Great Depression” was meant to be in my article. Unquote.

    My apologies, the link was accidentally omitted in the first published version of Mr. Rehmke's article. The link has now been added and works correctly.


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